Pension funds and university endowments allocate billions to private equity, hedge funds, and private real estate. The rationale is presented as being driven less by returns and more by payroll and institutional incentives. Complex alternative portfolios are described as being favored because admitting that simple index strategies work would raise questions about the value of analysts’ high compensation. A 60/40 allocation of broad equity index exposure and investment-grade bonds is characterized as cheap, liquid, transparent, and difficult to beat over long periods. Alternatives are said to have outperformed earlier, but competition has increased entry prices and compressed future returns, leaving incentives to sustain the existing investment machinery.
"“The evidence shows that these complicated portfolios don't beat a simple index, 60/40 index, which is 60% stocks and 40% bonds, which has been the standard for decades.”"
"“If staff told trustees to index everything, trustees would reasonably ask why they were paying analysts $700,000 per year to do what a computer can do for almost nothing.”"
"“Hook acknowledges that private market strategies once delivered. Alternatives did beat public comparables during their first 20 years. That track record built the mythology. But over the last 15 to 20 years, intense competition for deals has bid up entry prices, and higher purchase multiples have naturally compressed forward returns. The opportunity that justified the fee structure has largely been arbitraged away.”"
"“What remains, in Hook's telling, is the institutional incentive to keep the machine running. Pension boards want sophisticated-sounding reports. Endowment CIOs want peer-group cover. Consultants want to keep recommending what they recommended last year. The end result is a portfolio that justifies the staff, not the be”"
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